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The problem of bad debt is dire and India is grappling with the increasing number of non- performing assets (NPAs). As per the Reserve Bank of India (RBI), gross non-performing assets (GNPAs) might rise from 7.5% in March 2021 to 9.8% by March 2022 or even as high as 11.2% if economic conditions deteriorate further.
The RBI has been making significant moves to help banks deal with the issue of bad debts and NPAs. According to the apex bank, the opening of multiple accounts by a single borrower is one of the underlying reasons for the evergreening of funds and subsequent non-repayment of dues.
To foster credit discipline and encourage greater monitoring of diversion of funds the RBI issued a circular in August 2020 seeking reduction of the multiplicity of current accounts. The new guidelines restrict banks from opening current accounts for borrowers who have obtained credit facilities from the banking system. For banks with an exposure of less than 10% of loans of the banking system to a borrower, debits to their accounts can only be routed through banks with 10% or more of loan exposure from the borrower.
The RBI notification on ‘Opening of current accounts by Banks – Need for Discipline’ is a step in the right direction to rationalisation of multiple accounts with single borrowers in the banking system. Below are some of the steps to be taken by banks to ensure adherence and greater efficiency:
Concurrent audit services, an integral part of the bank’s governance framework, function as an early warning system to ensure timely detection of irregularities and lapses. Considering this notification, banks will need to include scope items such as review of all the new ‘current accounts’ opened, review of all new CC/OD facilities provided to borrowers, review of the escrow agreements with escrow managing banks and review of the bank’s system for end-use monitoring of funds by conducting independent on-site reviews of sample borrowers for applicable cases under the purview of concurrent audit.
In the interim, till the system functionalities are built and implemented, banks will need to draft and document manual workarounds. Processes such as fortnightly reconciliation of the borrowers who have opened current accounts with the CC/OD facilities availed, if any, or monthly sample review of the bank’s exposure to the (borrowers who have opened a current account) borrower holdings vis-à-vis the exposure of the banking system to the borrower will need to be meticulously set up to ensure adherence with these notifications.
Banks shall need to monitor all current accounts and CC/ODs periodically, at least on a half- yearly basis (as mandated by RBI), specifically for the exposure of the banking system to the borrower. Monitoring should not only be done to ensure that multiple accounts are not opened by a single borrower but also to ensure that funds are remitted through the CC/OD facilities, the current accounts, the collection accounts and the escrow accounts, if any, in line with the permissible purposes.
The KYC policy of banks will need to be revamped to include the revised ‘current account’ opening guidelines in line with the instructions of the notification. This revamping shall be critical as being a high-level statement of management intent, the policy drives the subsequent processes and procedures that need to be articulated and adhered to by the bank employees both at the branches and the back offices.
There are currently four authorised CICs in India that assist banks in determining the creditworthiness of the customer. These CICs provide the banks with bureau reports which contain details not only of the total exposure of a customer across the banking system, but also the exposure of the customer across facilities in requesting banks and other financial institutions. However, going forward it will be imperative for the banks to agree on a frequency to obtain these reports from the CICs.
Closure of existing current accounts of customers who have availed CC/OD facilities on priority.
While the notification does not explicitly state the steps to be taken by banks for the existing current accounts of borrowers having CC/OD facilities, to ensure adherence to this guideline, banks will have to intimate applicable customers and close such current accounts to ensure that all future transactions shall be routed through the CC/OD account.
The ‘current account’ opening form will need to be modified to include the additional declarations and undertakings required from the customer. Due diligence to be done at the branch level will need to be documented as checklists to be completed by the branch officials before accepting applications for opening of the current account. For banks that provide net banking services, the existing or potential customers will have to be made aware of the revised requirements in terms of documents required and permissible flow of funds from the existing CC/OD accounts.
The compliance function within the banks would need to ensure that the requirements are embedded within the wholesale banking operations teams. The audit programs will need to be developed to specifically track the implementation of the circular.
Banks need to successfully ensure adherence to the RBI circular to ensure that better end-use monitoring of funds and governance from a risk management perspective is possible within and across banks ultimately aiming towards a step in the direction of a stronger and more stable banking system in our country.
This article was originally published in ET BFSI.com.